Post on 19-Dec-2015
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Introduction Most portfolio investments are financial
assets, such as:• Common stock
• Corporate bonds
• Bank CDs
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Introduction (cont’d) Real assets:
• Are assuming an increased role in some of the country’s largest pension funds and in private investor portfolios
• Include timberland and gold• Do not have a corresponding liability unless
one is created to finance the purchase of the real asset
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Real Estate in General Investment characteristics Developed and undeveloped property Pension fund investment in real estate
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Investment Characteristics Characteristics of land:
• Immobile– Land cannot be moved
• Indestructible– Land cannot be destroyed
• Nonfungible– Ever plot of land is unique
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Investment Characteristics (cont’d)
Characteristics of land (cont’d):• Land is typically a long-term investment
– Especially for institutional timberland owners
• Land can be a short-term investment– E.g., timberland may be used for development or the
extraction of minerals
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Real Estate CategoriesResidential Commercial Industrial Farm Special
Purpose
Owner occupied
Office buildings
Light manufacturing
Timberland Cemeteries
Rental Store properties
Heavy manufacturing
Pastureland Churches
Lofts Mining Ranches Government properties
Theaters Orchards Golf courses
Garages Farmland Parks
Hotels and motels
Public bldgs. and streets
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Developed and Undeveloped Property
Developed property is land with improvements on it• E.g., shopping malls and apartment complexes• Purchased by investors for:
– Income-producing characteristics
– The tax advantage from depreciation of buildings
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Developed and Undeveloped Property (cont’d) Undeveloped (raw) property has no
improvements• E.g., undeveloped lots
• Investors purchase undeveloped property:– To speculate
– For the production of subdivided lots for resale or development
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Pension Fund Investment in Real Estate
U.S. pension funds have nearly $100 billion invested in real estate
In 2000, the average pension fund had about 20 percent of assets invested in real estate• Real estate investment can be convenient
through a real estate investment trust (REIT)
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Timberland in Particular Introduction Institutional interest in timberland A timberland investment primer
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Introduction Timberland is a very viable investment
form of real estate for large portfolios
The U.S. encompasses about 468 million acres of timberland
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Institutional Interest in Timberland
Innovative forms of ownership in timberland have been developed:• Public limited partnerships
• Closed-end investment companies in timberland
• Securitized units of timberlands of forest product companies
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Institutional Interest in Timberland (cont’d)
Examples of institutional interest:• Timberland investment management
organizations (TIMOs) managed about $9 billion in timberland near the end of 2001
• In 2001, Harvard Management put 6 percent of its $18.3 billion portfolio into timberland
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A Timberland Investment Primer
Timberland as an asset Timberland investors Timberland returns Timberland risks Problem of lack of information Timberland as a portfolio component Future prospects
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Timberland as An Asset Timberland as collateral Timberland as a strategic investment Timberland as a pure investment
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Timberland as Collateral Loans are routinely secured with timberland
by:• Life insurance companies
• The Federal Land Bank
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Timberland as A Strategic Investment
Timberland serves as a strategic investment when owning it:• Helps ensure the long-term viability of a
company or
• Reduces the volatility of a company’s cash flows
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Timberland as A Pure Investment
Portfolio managers hold timberland as a pure investment:• The property is held for its own investment
merits
• The property is not held as part of a strategic plan or to assist in project financing
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Timberland Investors The largest current owners of timberland
for pure investment purposes are:• CALPERS
• John Hancock Financial Services
• New Hampshire State Employees Retirement System
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Timberland Investors (cont’d)Owner Class 1952 1970 1996
Federal 103,124 107,108 124,008
State, county, and municipal
27,216 29,010 36,177
Forest industry, farmer owned, and other private
358,269 363,576 357,840
Total timberland 488,609 499,697 518,025
Total forestland 664,194 753,549 746,798
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Timberland Returns Timber grows on the land and is sold and
renewed• Growing timber is stumpage
The value of a stand of timber depends on:• The volume of wood on the acreage• The size and quality of the trees• The market price of the species of forest
products
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Timberland Returns (cont’d) A timberland investor’s return is a function
of:• The acquisition cost and selling price• Site productivity
– The ability of a site to grow timber, depends on weather, soil conditions, etc.
• Management competence– Silvicultural practices and management strategies
can affect return
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Timberland Returns (cont’d) A timberland investor’s return is a function
of (cont’d):• Market price
– Investors have substantial discretion in regard to time of harvest
– Price is influenced by the relative size of trees on the land
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Biological Risks Biological risk is the risk of loss due to
natural events:• Fire• Insects• Disease• Productivity• Wind
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Biological Risks (cont’d) Productivity risk refers to the possibility
that a stand of timber will not produce the anticipated volume of wood due to:• Species competition
• Drought
• Disease
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Economic Risks Economic risks include:
• Quality• Liquidity• Demand• Price• Management practices• Changes in the regulatory environment
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Economic Risks (cont’d) Management risk means that poor management
practices can erode the value of timberland
Liquidity risk exists because there is a relatively limited market for timber and timberland
Regulatory risk stems from statutes and ordinances that limit forest management and land use options
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Problem of Lack of Information
Problems with constructing a standard timber index:• Must consider the growth in timber volume• Must consider the low volatility associated with
land• Focusing on timber prices alone biases the
return downward and biases volatility upward• Timberland is nonfungible
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Problem of Lack of Information (cont’d)
Examples of timber indexes:• Wachovia’s Timberland Performance Index
(TPI)• The Warnell School’s Timber Mart South and
Timber Mart North• Log Lines• National Council of Real Estate Investment
Fiduciaries
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Timberland as A Portfolio Component
Virtually all studies of timberland find very low or negative correlation between timberland and other investment alternatives• Allows for substantial diversification benefits
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Timberland Correlation
Coefficients (1960-2000)Investment Correlation Coefficient
Timberland 1.00
Commercial real estate -0.11
S&P 500 index -0.29
Small cap equities -0.12
International equities -0.22
Treasury bills -0.02
Long-term corporate bonds -0.30
Inflation 0.37
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Introduction An increasing number of portfolio managers
may discover timberland as an investment:• Asset allocation strategies are in vogue
• Timberland allows for substantial portfolio diversification
Pension funds will probably continue to be the principal private investors
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Index Problems The lack of a consistent timberland index is
the single biggest barrier to increased investment by pension funds:• Continuous pricing by the market is difficult
due to:– Lack of liquidity– Timberland is not an exchange-traded product– Regional variations– The appraisal-based nature of timberland
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Social Risk The timber industry considers forestland to
be a renewable resource Many environmentalists do not consider
forestland to be a renewable resource
The length of reforestation depends on the species
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Gold Motivation for gold investment Determinants of the price of gold The London fix Investing in gold
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Motivation for Gold Investment
People often buy gold because of the security it is expected to provide during times of trouble• An insurance policy against inflation
• Particularly pronounced in Europe
• A currency without a country
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Motivation for Gold Investment (cont’d)
Gold can be an attractive investment because:• Gold has demonstrated returns that are
unrelated or even opposite to those of the stock market
– The correlation between the Philadelphia Stock Exchange’s gold and silver index and the S&P 500 index since 1986 has been 0.14
– The relationship is tenuous
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Determinants of the Price of Gold
Strength of the U.S. dollar• Influenced by trade balances and protectionism
concerns
The strength of foreign currencies• Stronger foreign currencies decrease the value
of gold measured in the home currency for foreign investors
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Determinants of the Price of Gold (cont’d)
Inflation and rising oil prices• An increase in the price of oil raises fears of
inflation and an increased price for gold
International finance uncertainty• Investors turn to gold as a result of mounting
debt, third-world loans, etc.
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The London Fix The London fix is the price of gold that
reflects the relative buy and sell orders that have been placed with member firms of the London Gold Market• The fix is determined twice each day at 10:30
a.m. and 3:00 p.m. London time
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The London Fix (cont’d) Gold prices also change in response to:
• Continuous exchange trading
• Economic news
• Political news
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Bullion Gold bars are bullion
• There are different sizes of gold bars (see next slide)
Investors can acquire smaller quantities of gold:• 1-ounce bars• Nuggets• Gold dust
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Bullion (cont’d)Unit of Weight Region Where Used Equivalent Troy Ounces
One Troy Ounce
USA, UK, Australia --
100 Grams Globally 3.2151
10 Tola India, Pakistan, Middle East, Singapore
3.75
5 Tael Hong Kong, Taiwan, China 6.017
10 Baht Thailand 4.901
5 Chi Vietnam 0.603
10 Dons Korea 1.206
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Bullion (cont’d) Shortcomings of bullion:
• Subject to theft
• No income productivity
• Lack marketability
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Gold Certificates Gold certificates are:
• Obligations of the issuer to deliver gold upon demand
• Issued by banks• Registered in your name• Readily sold back to the dealer
Gold certificates have the risk that there is no gold backing them
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Shares in Mining Companies Purchasing shares in mining companies is
the most popular form of gold ownership in the U.S.• E.g., Homestake Mining is the largest U.S.
gold-mining company
Some mutual funds specialize in gold or other precious metals
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Shares in Mining Companies (cont’d)
Owning shares in mining companies or mutual funds has advantages:• Shares are instantly marketable
• Shares can generate some income through dividends
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Coins Gold coins are popular with investors and
speculators
A coin’s intrinsic value is the higher of:• Its bullion value• Its fiat value
– The value assigned by the issuing government